Low share prices can feel like the starting point for massive gains, but you have to know what you're doing in this corner of Wall Street. Low-priced stocks are often tied to shoddy business models and they're cheap for good reason.
That being said, you can also find some fantastic buys in the bargain bin. I expect A10 Networks (ATEN 0.26%), Photronics (PLAB -0.32%), and Limelight Networks (EGIO 2.69%) to deliver strong returns over the next year or two, and all of them are trading below $10 per share. Here's a closer look at these three promising stocks with low prices.
A10 Networks, or ATEN, makes cables and connection systems that carry signals for audio, video, office printers, and other specialized data delivery situations. The stock is trading at $7 per share, having doubled from the lows of March but also retreating 23% from August's highs.
Investors were quick to take some profit off the table in the tech sector market panic of early September. This stock looks expensive if you focus on the big bounce from the earlier market bottom or the trailing price-to-earnings ratio of 150.
But it also looks downright cheap when you consider the P/E ratio of 14.2, based on forward earnings estimates. And if you worry about the COVID-19 health crisis thrashing ATEN's financial results, you're barking up the wrong tree. Revenue grew year over year in both the first and second quarters of 2020, and the good times should keep on rolling.
"To date, we have experienced a modest and manageable COVID-related impact on our business, with only a slight impact on our supply chain," CEO Dhrupad Trivedi said on the second-quarter earnings call. "We do not believe we have lost any business, and we continue to enjoy strong and steady demand for our solutions. In fact, we delivered increases in both product and service revenue compared to last year, despite these COVID-related slowdowns and delays."
For example, the Tokyo Olympics were supposed to add some fuel to ATEN's fires in 2020 but that boost has been shifted to 2021. The orders will come, just a bit later than expected. In the meantime, the stock looks very affordable right now and should have no trouble delivering strong returns for years to come.
This maker of photomasks used in manufacturing processes for semiconductors and flat-panel displays barely squeaks into the $10 club, closing Tuesday's trading at $9.95 per share. The stock is trading 40% below December's multi-year highs, including an 8% drop over the last month.
The company crushed Wall Street's expectations in the third-quarter report on Aug. 27, but management set up modest guidance targets for the next quarter. Share prices fell 21% over the next two weeks, reversing course when analyst company Stifel Nicolaus upgraded Photronics to a buy with a $13 price target.
The mellow fourth-quarter guidance was based on uncertainty around trade restrictions between Chinese and American companies. Photronics doesn't see any direct fallout from this international tension, but some of its customers might, so management decided to go for conservative short-term goals. We're still looking at a global leader in a crucial part of the semiconductor and electronics manufacturing sectors for the long haul. And Photronics' own factories are already running at nearly full speed, despite the geopolitical tensions and pandemic pressures of 2020.
"Notwithstanding the near-term uncertainty ... we anticipate maintaining relatively high utilization rates over the next few quarters," CFO John Jordan said in the third-quarter earnings call. "The next significant growth catalyst will be the capacity additions planned for 2021."
At these low prices, Photronics shares are trading at just 9.5 times free cash flow and 12 times forward earnings. Photronics shares are cheap due to short-term problems, but the company is positioned for solid long-term results.
That's a no-brainer buy in my book.
Finally, I just can't stop pounding the table for content delivery network (CDN) specialist Limelight Networks.
This stock is trading at $6.40 per share, 22% below July's multi-year highs. Like A10 Networks, Limelight looks expensive from a certain angle, in a certain light. The stock trades at 127 times trailing earnings and its free cash flows have been negative over the last four quarters.
But Limelight's revenue is skyrocketing due to the booming demand for high-quality content delivery solutions. Every new streaming media launch over the last year has included significant support from Limelight, including the stellar Disney+ introduction from Walt Disney and the promising Peacock platform from Comcast subsidiary NBCUniversal.
I would argue that this is merely the start of a long-lasting period of skyrocketing growth in the media-streaming sector. Limelight provides a necessary service that even media giants like Disney and massive network operators like Comcast find difficult to handle with in-house solutions. The addition of edge computing tools in recent months also gives Limelight a leg up on flashier CDN rivals such as Akamai Networks and Fastly.